Barker Industries issued 2,000 $1,000 bonds at 103. Each bond contains 20 detachable stock warrants that allow the bondholder to purchase a share of Barker's common stock for $50. Immediately after the issue, the warrants were selling for $4 each and the bonds without the warrants were selling for $986. How much will be credited to Additional Paid-in Capital-Stock Warrants? (Round intermediate calculations to four decimal places and your final answer to the nearest dollar.) Use the proportional method.

Question

Quizplus · Accepted Answer

The proportional method allocates the proceeds based on the relative fair values of the bonds and the warrants. The fair value of the warrants is 2,000 bonds * 20 warrants/bond * $4 = $160,000. The fair value of the bonds without warrants is 2,000 bonds * $986 = $1,972,000. The total fair value is $160,000 + $1,972,000 = $2,132,000. The proportion of the warrants is $160,000 / $2,132,000 = 0.0750. The total proceeds from the bond issue are 2,000 bonds * $1,000 * 1.03 = $2,060,000. The amount credited to Additional Paid-in Capital-Stock Warrants is $2,060,000 * 0.0750 = $154,597.

Barker Industries Issued 2,000 $1,000 Bonds at 103